Schapiro gets US SEC out of crosshairs

WASHINGTON (Reuters) - Mary Schapiro saved the Securities and Exchange Commission from being regulated out of existence. Now she will be judged on what she can do to restore its role as investor guardian and promoter of fair markets.

When the Washington veteran took over as SEC chairman a year ago, the agency’s reputation was in tatters.

Pilloried for missing Bernard Madoff’s $65 billion fraud and for its failure to detect brewing crises at now-defunct Lehman Brothers and Bear Stearns, the storied agency was seen as rudderless, its sense of mission lost in the deregulatory fervor of the George W. Bush administration.

Now Congress wants to give the SEC more funding to police Wall Street and additional authority to regulate everything from hedge funds to the over-the-counter derivatives market.

“I’d say for the first year she gets an A,” said David Martin, a former SEC director of corporation finance now with the Covington & Burling law firm.

“Right now all you can say is that all the body language, all the energy, and all the focus is very strong for an agency that looked lost a year ago,” he said.

But big tests still await Schapiro, such as fulfilling her pledge to make it easier for shareholders to have a say in putting forward nominations for directors.

If she backs away from a minimum proxy access standard for all public companies, she risks losing support from big institutional investors and investor advocates.

It also remains to be seen whether her changes to management and procedure at the SEC will imbue rank-and-file employees with new zeal to pursue the agency’s mission.

“The SEC is an agency with a long bureaucratic culture. It will really take some time to change many aspects of it,” said John Coffee, a law professor at Columbia University.

Observers credit Schapiro’s political astuteness with helping to repair the SEC’s battered reputation among lawmakers and investors.

The 54-year-old Schapiro has worked for more than two decades as a financial markets regulator and clearly understands the importance of congressional support.

From the spacious office she occupies on the top floor of the glass-sheathed SEC building in Washington, she commands a sweeping view of the capitol dome.

She has won over lawmakers by responding quickly to their letters and concerns.


“She has done a great job. Within the first week she started beefing up enforcement,” said Senator Jack Reed, chairman of the Senate’s securities subcommittee, which has oversight over the SEC. “I think she has brought a real focus on investors and protecting investors rather than protecting issuers and companies.”

Schapiro immediately moved to undo some of the policies instituted by her predecessor, Christopher Cox, who was appointed by Bush and later criticized for his laissez-faire approach to financial markets.

Schapiro scrapped the practice of requiring full commission approval for negotiated settlements with companies accused of securities laws violations and made it easier for staff to open investigations and issue subpoenas.

And she brought in former federal prosecutor Robert Khuzami, who successfully prosecuted the architects of a plot to bomb New York City landmarks, to head the enforcement division.

Together, they have restructured the division, streamlined management, created specialized units for high-priority matters and put more attorneys on the front lines.

The division is also encouraging greater cooperation by individuals under investigation through cooperation agreements and deferred and nonprosecution pacts -- standard weapons for prosecutors but, surprisingly, never deployed before by the SEC.

“I give her high marks for changing the view of the agency,” said James Cox, a Duke University securities law professor.

Schapiro also initiated a series of reforms to address failings exposed by the financial crisis and Madoff scandal.

She pushed for reforms to improve how companies are governed amid public furor over executive pay and lax corporate boards.

And she started moving on policies important to pension funds and big labor. She adopted a rule barring broker-dealers from voting for directors on behalf of their clients unless instructed to do so and advanced a proposal to give investors more influence over the composition of corporate boards.


But the SEC has also stumbled under Schapiro's watch, most notably when a federal judge scuttled the agency's $33 million settlement with Bank of America BAC.N in a case alleging the bank misled shareholders by failing to disclose material information.

Some critics have accused the commission of pandering to lawmakers with proposals to reinstate a Depression era rule to curb short selling.

Others have decried what they saw as caving in to banking and congressional pressure when the Financial Accounting Standards Board and the SEC agreed to relax the mark-to-market accounting rule requiring banks to post billions of dollars in writedowns.

Tom Gorman, an attorney who blogs about the SEC, commended Schapiro for the management and procedural changes she has made. But he compared that to “rearranging the chairs on the deck and making them more efficient” without necessarily endowing the agency with a core sense of mission.

“It’s real mission,” he said, “is to bring a new ethics to the marketplace. That’s why it was created and that’s what it has always done.”

It may be premature to fault Schapiro for lacking an overarching vision for the agency when so many holes needed plugging when she came aboard. A vegetarian who credits her dietary regimen to her love of animals, Schapiro has shown a willingness to tackle meaty issues while steering a pragmatic course for the SEC.

Whether that will be enough to restore the luster of the SEC, created to protect investors after the market turmoil of the Great Depression, remains an open question. But it seems clear the SEC is no longer the whipping boy it was a year ago.

Columbia’s Coffee said changing the SEC’s culture was a little like changing the culture of the Roman Catholic Church. “A new pope can come in, but the curia is still there and the cardinals still have their set traditions.”

Reporting by Rachelle Younglai and Dan Margolies; Editing by Tim Dobbyn